Weekly Market Review - Insights | Affin Hwang Asset Management

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A Brief on Global & Local Markets, Investment Strategy.

Week in Review | 4 january - 8 january 2021

A Strong Start to 2021

Financial markets ushered in the new year on a strong note, as major equity indices edged higher behind expectations of a recovery across economies.

On global developments, the US Democratic party secured the final two Senate seats at the runoff elections in Georgia last week; effectively solidifying its control over both the Congress and White House. The results sparked an unprecedented mob attack on the US Capitol by rioters shortly after, though financial markets appear to be more focused on the positive side of things which saw the S&P 500 index ending the week with a 1.8% gain. The 10-year UST benchmark yield also trended higher to close Friday around the 1.10% level.

Following the Democrat’s blue sweep victory, markets are now pricing in a higher fiscal spending by the Biden administration. More COVID-19 relief measures – as previously advocated by the party – could potentially be underway; including additional stimulus cheques of US$1,400 on top of the current US$600, as well as an extension to its unemployment benefits which is currently due to end in March 2021, among others. These stimulus measures may come as soon as within 1Q2021 given the recent disappointment in labour data for December 2020, which showed a reduction of 140,000 jobs as compared to initial estimates of 50,000 new jobs.

The positive sentiment was also fuelled by the comments of Fed vice chairman Richard Clarida, who has affirmed that the central bank is not in a hurry to taper its QE programme and will continue to stay accommodative as the US economy continues to reel in from the effects of the pandemic.

On the flipside, the Asian region also posted strong gains in the first week of 2021 as investors were seen putting money back to work. Notable outperformers in the region include the Korean KOSPI and the Taiwanese market which were up 9.7% and 5.0% respectively in the week. The broader MSCI Asia ex Japan index also ended week higher with a 5.2% gain.

The Korean market was lifted by heavyweight names, such as Samsung who saw its share price rallied strongly amid reports of ongoing discussions with Intel Corp who is looking to outsource their foundry operations to Samsung alongside TSMC. Within the electric vehicle (“EV”) space, Hyundai Motors also saw its share price spiked as Apple Inc. is rumoured to be in early discussions with the Korean automaker to produce a self-driving EV.

Overall, while there are still risks and uncertainties that remain, financial markets look poised for a healthy recovery in the near- to medium-term on the back of sound fundamentals, vaccine rollouts, positive earnings growth trends, as well as accommodative policies. Asian markets, in particular, could see additional support from a weakening USD trend. In terms of our portfolios, we continue to see opportunities in value / recovery-plays including banks and materials, as well as the more stable secular growth names.

Updates on Malaysia

On the domestic front, the benchmark KLCI bucked regional trend to close the week barely unchanged, as the country braced itself for another hard lockdown amid a sharp spike in COVID-19 cases. According to the recent announcement by the Prime Minister, six states – including Penang, Selangor, Kuala Lumpur, Melaka, Johor and Sabah – will be placed under a Movement Control Order (“MCO”) for two weeks beginning 13 January 2021, while Conditional MCO and Enhanced MCO have also been imposed across other states.

Nevertheless, with the lockdown already factored in, we do not see too significant a downside for the local market especially with the impending rollout of vaccines. In addition, the recent state of emergency declaration by the Yang Di-Pertuan Agong on 12 January 2021 would see the risks of elections be placed on hold for the time being; thus putting a temporary rest to political noises while the government can also focus their efforts in containing the pandemic which is crucial for a smoother recovery.

On portfolio positioning, we continue to focus on value and recovery plays as well as secular tech names within the 5G and cloud computing space. We also to see opportunities in US-China trade divergence plays as global manufacturers are expected to diversify their manufacturing out of China as trade tensions will continue to persist.

Fixed Income Updates & Positioning

Renewed tensions between US and China prompted a rather mixed session for the Asian credit space last week, as the Trump administration continued its scrutiny on business dealings with Chinese corporates and state-owned enterprises (“SOE”).

According to latest developments, the US is now looking to add Chinese tech players – including Alibaba and Tencent among others – into its ban list. In addition, further uncertainty was imbued after the NYSE went back on its decision to delist three Chinese telecommunication players – namely China Mobile, China Unicom and China Telecom – only to revert back to its original decision at the end of the week.

Following which, sentiment wore thin for the Chinese tech and SOE space, which makes up a sizable component within the Asian credit index. Chinese tech names bore the brunt of the selloff as yields widened by as much as 25 to 30 bps. Despite the pullback, we are convinced on the sound fundamental positioning of names such as Alibaba and Tencent, and we remain comfortable in our exposure to these names given that both businesses are very much domestic-driven.

While the recent directive could see US banks refraining from facilitating market making services for these names, we believe that there is ample room for Asian banks to step up to take on these additional supplies. Also considering that the bulk of investors for such Chinese corporates and SOEs are based in Asia itself, we believe that liquidity should remain supportive and we expect the chase for yields in the region to continue in the near- to medium-term.

In terms of portfolio action for our regional funds, we took the opportunity to participate in several new deals within the Chinese property space such as Country Garden and Yuzhou Group for added yield carry. In addition, we also participated in a 5-year issuance that was priced at 2.15% by Hai Di Lao.

Back home, the Malaysian bond market started the session strong but soon saw momentum tapered off towards the end of the week amid the rise in UST yields, as well as expectations of a hard lockdown across the country. The 10-year MGS benchmark yield ended the week 2 bps higher to close at 2.67%.

On the primary front, markets were greeted with a 7-year MGS reopening last week of RM3.5 billion in size. The issuance posted a healthy bid-to-cover ratio of 2.0x and closed with an average yield of 2.45%. As for the corporate segment, Khazanah is expected to tap into the market in the coming weeks to raise an estimate size of RM1.5-RM2.0 billion. In addition, Pulau Indah Power Plant is also looking to issue a AA3-rated bond of around RM3 billion in size in the coming weeks.

On a separate note, foreign flows data continue to be supportive for the month of December 2020, as the local bond market added another RM3.6 billion worth of inflow to push the cumulative total for the year to RM18.3 billion (vs. RM19.9 billion in 2019). As of end-December 2020, the foreign holdings for MGS stood at 40.6%.

Treading ahead, market attention will likely be focused on the upcoming Monetary Policy Committee meeting on 20 January 2021. The consensus is that Bank Negara Malaysia will likely keep its Overnight Policy Rates unchanged at this juncture. Though having said that, there is certainly room for the central bank to deliver another interest rate cut especially given the reintroduction of MCO. We will continue to keep a close watch on further developments on this front.

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